Before the advent of the present-age paper currency, people held their assets in the form of precious metals, like gold. Gold has historically been the most precious metal, and it has been intrinsically linked with social and cultural milieu of all ages. Along with being an indicator of a person’s wealth in historical ages, gold was often passed on to subsequent generations as inheritance. In the modern period, however, investment in gold has lost its sheen because of the advent of better investment avenues, like stocks and securities. But, gold continues to play an important role in portfolio diversification of most investors. It is also an investment, which can beat inflationary trends. In the times of macroeconomic uncertainty and turbulence, investment in gold can provide financial protection.
Gold investment amidst the Covid-19 crisis:
Because of the outbreak of Coronavirus, gold prices have increased considerably in the last few weeks. According to reports from the Indian Bullion and Jewellers Association Ltd, gold prices peaked at Rs 46,000 for 10 grams (999 purity) in the third week of April 2020. For the first fortnight of April, there was a 7% increase in the prices of gold. During intraday trading at Multi Commodity Exchange of India Limited (MCX), the price for gold futures reached Rs 47,000 for 10 grams on April 16, 2020. Returns from gold investments in April were around 11%.
Equity investment amidst the Covid-19 crisis:
Stock markets across the globe crashed because of the Covid-19 crisis. Indian stock markets fell by around 23% in March. On an average, stock prices fell by around 30%-40%. At present, the market value erosion of Indian equity market stands at 25% as compared to the global figures of around 15%.
Reasons for high demand of gold:
According to industry experts, gold is among the safest asset classes, especially during times of market volatility and crisis. As such, more people are investing either in physical gold or gold-backed Exchange-Traded Funds (ETFs). The value of gold ETFs in the country increased by more than 34% from December 2019 to March 2020, as per data from the Association of Mutual Funds in India (AMFI). Industry experts believe that stimulus packages by the government could increase liquidity, while interest rates would continue to remain low. This could further increase the demand for gold. As per some estimates, the price of gold could rise up to more than 30% in the next 12 months.
Understanding Gold-backed ETFs:
One unit of the ETF in India represents 1 gram of gold. According to the market regulator, Securities Exchange Board of India (SEBI), gold ETFs have prices based on their Net Asset Value (NAV). The prices of trading for these ETFs, however, can be different, based on market dynamics. At present, gold ETFs have a higher premium vis-à-vis their NAV. This is because of the lockdown, which has disrupted the supply of physical gold.
Gold vs. equities: are investments in gold safer?
It has been historically proven that equity markets provide the highest returns in the long-term. But equity investments are also subject to high market risks. In the present scenario, with the threat of an impending economic crisis, investment in gold can be a safe investment alternative. Typically, gold investment provides moderate to high returns even when other asset classes, including equities are under-performing. You can consider expanding the percentage of gold investment in your portfolio to insulate yourself from market shocks.
While investing in gold ETFs, market experts suggest considering the returns from the ETFs as compared to the returns from physical gold – also known as tracking errors. The trading volume along with the bid price and ask price should also be considered before purchasing gold-backed ETFs.
Along with investment in physical gold and ETFs, you can also consider investing in Sovereign Gold Bonds (SGBs). Recently, the government has announced that there will be around six SGB issues from April to September. SGBs provide a fixed and assured interest rate, over and above the returns from gold.
Thus, investment in gold can be a viable investment option when the threat of an impending economic crisis is looming large. Along with investment in physical gold, you also have the option to invest in gold-backed ETFs and SGBs. If you want to trade in gold futures at the MCX, always remember to choose a trusted and reliable stock broker, which can provide cutting-edge trading platforms along with comprehensive market reports. You can zero in on Angel One, which can help you in commodity trading with a free Demat Account, sans Annual Maintenance Charge (AMC) and brokerage fees.